Emerson - 10-Q quarterly report FY

 

 

 

 

 

 

OR

 

 

For the transition period from ____________________ to __________________

 

Commission file number 1-278

 

(Exact name of registrant as specified in its charter)

 

 

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

 

 

FORM 10-Q

 

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 2006 AND 2007

(Dollars in millions, except per share amounts; unaudited)

 

See accompanying Notes to Consolidated Financial Statements.

 

 

FORM 10-Q

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES        

CONSOLIDATED BALANCE SHEETS

 

See accompanying Notes to Consolidated Financial Statements.

 

 

FORM 10-Q

 

EMERSON ELECTRIC CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED MARCH 31, 2006 AND 2007

 

See accompanying Notes to Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

Changes in the goodwill balances since September 30, 2006, are primarily due to additions from acquisitions, particularly in the Process Management segment ($139 million), as well as from the translation of non-U.S. currencies to the U.S. dollar. Third-party valuations of assets are in-process; purchase price allocations are subject to refinement.

 

 

 

 

Net periodic pension expense for the three months and six months ended March 31, 2006, included a pretax charge of $9 million related to statutorily mandated Mexican termination benefits.

 

Net postretirement plan expense is summarized as follows (dollars in millions):

 

Net postretirement plan expense for the three months and six months ended March 31, 2006, included a pretax charge of $5 million related to a division’s retiree medical plan design.

 

 

For the six months ended March 31, 2007 and 2006, the Company recorded gains of approximately $24 million and $18 million, respectively, for payments received under the U.S. Continued Dumping and Subsidy Offset Act. During the six months ended March 31, 2007, the Company sold its remaining 4.5 million shares of MKS Instruments, Inc. (MKS), a publicly-traded company; the Company recorded pretax gains on these sales of $13 million and $19 million during the first and second quarters of fiscal 2007, respectively, compared to a pretax gain of $6 million recorded in the second quarter of fiscal 2006.

 

 

 

 

 

During the first six months of 2007, rationalization actions included the following. Process Management included start-up costs related to capacity expansion in China to serve the Asian market, as well as severance and start-up and moving costs related to the movement of certain operations in Western Europe to Eastern Europe and Asia to improve profitability. Industrial Automation included severance and start-up and moving costs related to the consolidation of certain power transmission facilities in Asia to obtain operational efficiencies and serve Asian markets. Network Power included severance related to the closure of certain power conversion facilities acquired with Artesyn, as well as severance and start-up and moving costs related to the shifting of certain power systems production from the United States and Europe to Mexico to remain competitive on a global basis. Climate Technologies included start-up costs related to capacity expansion in Mexico and Eastern Europe to improve profitability and to serve these markets, and start-up and moving costs related to the consolidation of certain production facilities in the United States to obtain operational efficiencies. Appliance and Tools included severance and start-up and moving costs related to the shifting of certain production from Canada to Mexico and severance related to the closure of certain motor production in Europe to remain competitive on a global basis.

 

Including the $40 million of rationalization costs incurred during the six months ended March 31, 2007, the Company expects rationalization expense for the entire 2007 fiscal year to total approximately $85 million to $95 million, including the costs to complete actions initiated before the end of the second quarter and actions anticipated to be approved and initiated during the remainder of the year.

 

Rationalization actions during the first six months of 2006 included the following. Industrial Automation included start-up and moving costs related to shifting certain motor production in Western Europe to Eastern Europe, China and Mexico to leverage costs and remain competitive on a global basis and to serve these markets. Network Power included mainly severance, start-up and vacant facility costs related to the consolidation of certain power systems operations in North America and the consolidation of administrative operations in Europe to obtain operational synergies. Climate Technologies included severance related to the movement of temperature sensors and controls production from Western Europe to China in order to improve profitability and to serve the Asian market. Appliance and Tools included primarily severance and start-up and moving costs related to the shifting of certain tool and motor manufacturing operations from the United States and Western Europe to China and Mexico in order to consolidate facilities and improve profitability.

 

 

 

 

Intersegment sales of the Appliance and Tools segment for the three months ended March 31, 2007 and 2006, respectively, were $139 million and $132 million.

 

Intersegment sales of the Appliance and Tools segment for the six months ended March 31, 2007 and 2006, respectively, were $252 million and $249 million.

 

 

 

 

 

 

The Company’s results for the second quarter and first six months of fiscal 2007 were strong, with sales increasing for all five business segments over the prior year periods. The Network Power, Process Management and Industrial Automation businesses had strong performances and drove gains in a favorable economic environment as gross fixed investment expanded during the first six months of fiscal 2007. Strong growth in Europe and Asia, acquisitions and favorable foreign currency translation contributed to the second quarter and first six months’ results. Earnings for four of the five business segments increased for the three and six months ended March 31, 2007 compared to the prior year periods. Profit margins remained at high levels, primarily due to leverage on increased sales volume and benefits from previous rationalization actions. Emerson's financial position remains strong and the Company continues to generate substantial cash flow.

 

 

 

Net sales for the quarter ended March 31, 2007 were $5,513 million, an increase of $661 million, or 14 percent, over net sales of $4,852 million for the quarter ended March 31, 2006, with both U.S. and international sales contributing to this growth. The consolidated results reflect increases in all of the business segments, with a more than 7 percent ($353 million) increase in underlying sales (which exclude acquisitions, divestitures and foreign currency translation), a 4 percent ($199 million) contribution from acquisitions, net of divestitures, and a more than 2 percent ($109 million) favorable impact from foreign currency translation. The underlying sales increase for the second quarter reflects 12 percent growth in total international sales and 3 percent growth in the United States. The international sales growth was led by increases in Europe (11 percent) and Asia (14 percent). The Company estimates that the underlying sales growth primarily reflects an approximate 3 percent gain from volume, an estimated 2 percent impact from penetration gains and an approximate 2 percent increase from higher sales prices.

 

Cost of sales for the second quarters of fiscal 2007 and 2006 were $3,561 million and $3,118 million, respectively. Cost of sales as a percent of net sales was 64.6 percent in the second quarter of 2007, compared with 64.3 percent in the second quarter of 2006. The increase in cost of sales as a percent of net sales was primarily the result of acquisitions. Gross profit was $1,952 million and $1,734 million for the second quarters ended March 31, 2007 and 2006, respectively, resulting in gross profit margins of 35.4 percent and 35.7 percent. The increase in the gross profit during the second quarter primarily reflects higher sales volume and prices, as well as acquisitions. Higher sales prices were substantially offset by higher material costs and wages.

 

Selling, general and administrative (SG&A) expenses for the second quarter of 2007 were $1,115 million, or 20.2 percent of net sales, compared with $1,005 million, or 20.7 percent of net sales, for the second quarter of 2006. The increase of $110 million was largely due to the increase in variable costs on higher sales and acquisitions. The decrease in SG&A as a percent of sales was primarily the result of leveraging fixed costs on higher sales and acquisitions.

 

 

 

Earnings before income taxes for the second quarter of 2007 increased $111 million, or 18 percent, to $736 million, compared to $625 million for the second quarter of 2006. The earnings results primarily reflect increases of $49 million in the Process Management, $27 million in the Network Power and $20 million in the Industrial Automation business segments.

 

Income taxes were $242 million and $191 million for the three months ended March 31, 2007 and 2006, respectively. The effective tax rate was 33 percent in the second quarter of 2007 compared to 31 percent in the prior year period. The effective tax rate for the entire fiscal year 2007 is expected to be approximately 32 percent.

 

Net earnings were $494 million and earnings per share were $0.61 for the three months ended March 31, 2007, increases of 14 percent and 17 percent, respectively, compared to $434 million and $0.52 for the three months ended March 31, 2006. The 17 percent increase in earnings per share also reflects the purchase of treasury shares.

 

 

 

During the second quarter of fiscal 2007, sales in the Process Management segment increased 18 percent to $1,345 million, driven primarily by higher volume and acquisitions. Nearly all of the businesses in this segment reported higher sales, with the measurement, systems and valves businesses leading the overall sales increase. Sales and earnings (defined as earnings before interest and taxes for the business segments discussion) were notably strong for these businesses due to continued demand in the energy markets, particularly power, and oil and gas. Underlying sales increased approximately 11 percent, reflecting 8 percent from volume, and approximately 3 percent combined positive impact from penetration gains and slight increase in sales prices. The Bristol and Damcos acquisitions contributed 4 percent ($47 million) and foreign currency translation added 3 percent ($33 million). The underlying sales increase reflects growth in the United States (13 percent), Middle East (71 percent), Europe (6 percent) and Asia (7 percent). Second quarter earnings increased 26 percent to $239 million from $190 million in the prior year period, reflecting higher sales volume, as well as acquisitions. The margin improvement is primarily due to leverage on the higher sales.

 

 

Sales grew 13 percent to $1,057 million in the Industrial Automation segment for the three months ended March 31, 2007, reflecting the favorable economic environment for capital goods. All of the businesses in the segment reported higher sales. Robust activity in the oil, gas, mining and metals markets drove growth in the power generating alternator, the fluid power and control and the electrical distribution businesses. Second quarter underlying sales grew 10 percent, reflecting global industrial demand, and included the benefit of an estimated 3 percent positive impact from price and penetration gains. Foreign currency translation had a 4 percent ($35 million) favorable impact, while divestitures had a 1 percent ($5 million) unfavorable impact. The underlying sales increase reflects growth in nearly all of the major geographic regions, including 15 percent growth internationally and 4 percent growth in the United States. The international sales growth was led by a 15 percent increase in Europe, particularly in the power generating alternator business. Earnings increased 15 percent over the prior year period to $151 million, reflecting the higher sales volume and related leverage. Higher sales prices were offset by higher material and wage costs, as well as negative product mix.

 

 

Network Power sales increased 19 percent to $1,191 million during the second quarter of 2007 compared to the prior year period, driven by the Artesyn and Knürr acquisitions and reflecting continued demand in the power systems, precision cooling and control systems businesses. The sales increase reflects an underlying sales growth of 6 percent, an 11 percent ($119 million) contribution from acquisitions, net of divestitures, and a 2 percent ($17 million) favorable impact from foreign currency translation. The underlying sales growth of 6 percent reflects higher volume of 3 percent, and 3 percent collectively from penetration gains and slight increase in sales prices. Geographically, the underlying sales increase reflects growth in the United States (4 percent) and Asia (15 percent), while sales in Europe declined 3 percent. The growth in the United States reflects substantial investment in data room construction and non-residential computer equipment which was partially offset by weakness in the North American telecommunications power market. The Company’s market penetration in China and other Asian markets continued. Earnings of $146 million increased $27 million, or 22 percent, from the prior year period primarily due to acquisitions along with the underlying sales growth. The earnings improvement also reflects savings from prior cost reduction efforts as well as favorable product mix, partially offset by higher material and wage costs.

 

 

Sales in the Climate Technologies segment increased 11 percent to $945 million for the quarter ended March 31, 2007. The increase was driven by more than 6 percent growth in underlying sales, a 3 percent ($27 million) contribution from acquisitions and a more than 1 percent ($12 million) favorable impact from foreign currency translation. Sales price increases and penetration gains accounted for substantially all of the underlying sales increase, which was driven primarily by international sales growth of 23 percent, partially offset by a decline in the United States of nearly 3 percent. The decline in the United States reflects slowing residential construction rates, as well as customer purchases of legacy products in the prior year period in anticipation of the efficiency standard change in the United States that became effective on January 23, 2006. The international sales increase was led by growth in Europe (28 percent) and Asia (19 percent). The increase in Europe includes penetration in the heat pump market. Earnings increased 14 percent during the quarter to $141 million primarily due to savings from prior period cost reduction efforts, lower rationalization costs compared to the prior year period and positive product mix. The margin improvement was diminished as higher material and wage costs offset sales price increases.

 

 

The Appliance and Tools segment sales increased 6 percent to $1,133 million in the second quarter of 2007. The sales increase represents more than 3 percent growth in underlying sales, a 1 percent ($12 million) favorable impact from foreign currency translation and a 1 percent ($11 million) contribution from acquisitions. The underlying sales increase of more than 3 percent reflects an approximate 6 percent positive impact from higher sales prices, an estimated 3 percent decrease in volume and an approximate 1 percent impact from penetration gains. The second quarter results were mixed across the businesses. The tools businesses experienced solid underlying growth, while the appliance controls business declined. Growth in the tools businesses was driven by demand in the non-residential construction markets. Increases in the hermetic, commercial and European appliance motors and storage businesses were partially offset by a decline in the North American appliance motors business. The underlying growth in motors and storage businesses was primarily due to sales price increases while volume levels declined. Total international sales grew approximately 11 percent, while underlying sales in the United States grew approximately 2 percent. Earnings decreased from $151 million in the prior year period to $137 million for the second quarter. The decreases in both earnings and margin primarily reflect deleverage on the lower volume. Higher sales prices were offset by higher raw material and wage costs, as well as store reset and new product launch costs in the storage and disposer businesses.

 

 

 

 

Cost of sales for the first six months of fiscal 2007 and 2006 were $6,817 million and $6,073 million, respectively. Cost of sales as a percent of net sales was 64.5 percent in the first half of 2007, compared with 64.6 percent in the prior year period. Gross profit was $3,747 million and $3,327 million for the six months ended March 31, 2007 and 2006, respectively, resulting in gross profit margins of 35.5 percent and 35.4 percent. The increase in the gross profit during the first half of 2007 primarily reflects higher sales volume and prices and acquisitions, as well as benefits realized from productivity improvements. Higher sales prices were offset by higher material prices and wage costs.

 

Selling, general and administrative expenses for the six months ended March 31, 2007 were $2,193 million, or 20.8 percent of net sales, compared with $1,955 million, or 20.8 percent of net sales, for the six months ended March 31, 2006. The increase of $238 million was primarily due to the increase in variable costs on higher sales and acquisitions.

 

Other deductions, net were $62 million for the first half of fiscal 2007, a $15 million decrease from the $77 million for the same period in the prior year. The first six months of 2007 include a gain of approximately $24 million for a payment received under the U.S. Continued Dumping and Subsidy Offset Act, compared with an $18 million payment received in the prior year period. The first six months of 2007 also include a gain of approximately $32 million related to the sale of shares of MKS, compared with a gain of approximately $6 million in the prior year period. For the six months ended March 31, 2007, ongoing costs for the rationalization of operations were $40 million, compared to $34 million in the prior year period. Amortization of intangibles increased $11 million compared to the prior year period due to acquisitions. See notes 7 and 8 for further details regarding other deductions, net and rationalization costs.

 

Earnings before income taxes for the first six months of 2007 increased $181 million, or 15 percent, to $1,376 million, compared to $1,195 million for the six months ended March 31, 2006. The earnings results primarily reflect increases of $90 million in Process Management, $43 million in Industrial Automation and $36 million in Network Power.

 

Income taxes were $437 million and $362 million for the six months ended March 31, 2007 and 2006, respectively. The effective tax rate was 32 percent for the first half of 2007 compared to 30 percent in the prior year period. The effective tax rate for the entire fiscal year 2007 is expected to be approximately 32 percent.

 

Net earnings were $939 million and earnings per share were $1.16 for the six months ended March 31, 2007, increases of 13 percent and 16 percent, respectively, compared to $833 million and $1.00 for the six months ended March 31, 2006. The 16 percent increase in earnings per share also reflects the purchase of treasury shares.

 

 

During the first six months of fiscal 2007, Process Management sales increased 14 percent, on higher volume and acquisitions, to $2,563 million, and earnings increased 25 percent. Nearly all of the businesses reported sales increases compared to the prior year period. Sales and earnings were particularly strong for the measurement, systems and valves businesses due to worldwide growth in oil and gas projects and expansion in China. Underlying sales increased 8 percent, reflecting 6 percent from volume, and approximately 2 percent collectively from penetration gains and slightly higher sales prices. The Bristol and Damcos acquisitions contributed 3 percent ($68 million) and foreign currency translation had a 3 percent ($66 million) favorable impact. The underlying sales increase reflects growth in nearly all of the major geographic regions, including the United States (8 percent), Middle East (71 percent), Asia (6 percent) and Europe (5 percent), compared with the prior year period. Earnings for the first six months of fiscal 2007 increased 25 percent to $456 million from $366 million in the prior year period. Higher sales volume and leverage drove the increase, and together are estimated to have contributed nearly 2 percentage points to the margin improvement. Earnings also reflect savings from prior cost reduction efforts, which were more than offset by higher wage and other costs.

 

 

 

 

The Network Power segment sales increased 23 percent to $2,390 million for the first six months of 2007 compared to the prior year period, driven by the Artesyn and Knürr acquisitions and reflecting continued demand in the power systems, embedded power and precision cooling businesses. Underlying sales grew 7 percent, while acquisitions, net of divestitures, contributed 14 percent ($282 million) and foreign currency translation had a 2 percent ($34 million) favorable impact. The underlying sales increase of 7 percent reflects an approximate 4 percent gain from higher volume and an estimated 3 percent impact from penetration gains, which were partially offset by a slight decline in sales prices. Geographically, underlying sales reflect an 18 percent increase in Asia and a 5 percent increase in the United States. The U.S. growth reflects strong demand for data room and non-residential computer equipment. The Company’s market penetration in China and other Asian markets continued. Earnings for the six months ended March 31, 2007 of $263 million increased $36 million, or 16 percent, from the prior year period reflecting acquisitions and leverage on higher sales volume. The margin was primarily reduced by the Artesyn acquisition, while benefits from prior cost reduction efforts were offset by higher material and wage costs.

 

 

 

 

The Appliance and Tools segment sales increased 5 percent to $2,221 million for the first six months of 2007. This increase reflects approximately 3 percent growth in underlying sales, a 1 percent ($24 million) favorable impact from foreign currency translation and a 1 percent ($22 million) contribution from acquisitions. The results for the first six months were mixed across the businesses. The tools and European appliance motors businesses showed strong growth, while the storage businesses had solid growth. These increases were partially offset by softness in the North American appliance motors and controls businesses. The growth in the tools and storage businesses was driven by the U.S. market, reflecting higher demand at major retailers. The underlying sales increase of 3 percent reflects an approximate 5 percent positive impact from higher sales prices, partially offset by a 3 percent loss of volume, and an estimated 1 percent impact from penetration gains. Total international underlying sales grew 11 percent, while underlying sales in the United States grew approximately 1 percent during the first half of 2007. Earnings were essentially flat when compared to the prior year period. Overall, increases in sales prices were offset by higher material costs (particularly copper, steel and plastics) and deleverage on lower sales volume, diluting the profit margin.

 

 

 

A comparison of key elements of the Company's financial condition at the end of the second quarter as compared to the end of the prior fiscal year follows:

 

The ratio of total debt to total capital increased to 36.1 percent as of March 31, 2007, or 5.3 percentage points above the 30.8 percent ratio for the prior year second quarter. The Company's long-term debt is rated A2 by Moody's Investors Service and A by Standard and Poor's. The Company's interest coverage ratio (earnings before income taxes and interest expense, divided by interest expense) was 11.5 times for the six months ended March 31, 2007, compared to 12.0 times for the same period in the prior year primarily due to higher average borrowings.

 

Cash and equivalents increased by $284 million during the six months ended March 31, 2007. During the first quarter of 2007, the Company issued $250 million of 5.125%, ten-year notes under a shelf registration statement filed with the Securities and Exchange Commission. Cash flow provided by operating activities of $875 million was up $7 million compared to $868 million in the prior year period. Operating cash flow, the net increase in short-term borrowings of $398 million and the $248 million of proceeds from long-term debt were used primarily to fund purchases of treasury stock of $478 million, pay dividends of $421 million, fund capital expenditures of $276 million and fund purchases of businesses of $172 million. For the six months ended March 31, 2007, free cash flow of $599 million (operating cash flow of $875 million less capital expenditures of $276 million) was down 9 percent from free cash flow of $654 million (operating cash flow of $868 million less capital expenditures of $214 million) for the same period in the prior year, primarily due to higher capital expenditures in the six months ended March 31, 2007, as compared to the prior year period.

 

 

 

The outlook for Emerson remains positive for fiscal 2007. Underlying sales growth for fiscal 2007 is expected to be in the range of 5 percent to 7 percent, which excludes an approximate 4 percent favorable impact from foreign currency translation, acquisitions and divestitures. Reported sales growth is expected to be in the range of 9 percent to 11 percent. Based on this level of sales growth, the Company expects to generate 2007 earnings per share in the range of $2.50 to $2.60, which would represent growth in the range of 12 percent to 16 percent above the $2.24 per share earned in fiscal 2006. Rationalization of operations expense is estimated to be approximately $85 million to $95 million for fiscal 2007. Operating cash flow is estimated at approximately $2.7 billion and capital expenditures are estimated to be $0.7 billion for 2007.

 

Statements in this report that are not strictly historical may be "forward-looking" statements, which involve risks and uncertainties, and Emerson undertakes no obligation to update any such statement to reflect later developments. These include economic and currency conditions, market demand, pricing, and competitive and technological factors, among others which are set forth in the “Risk Factors” of Part I, Item 1, and the "Safe Harbor Statement" of Exhibit 13, to the Company's Annual Report on Form 10-K for the year ended September 30, 2006, which are hereby incorporated by reference.

 

 

Emerson maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including the Company’s certifying officers, as appropriate to allow timely decisions regarding required disclosure. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and procedures were effective as of March 31, 2007, to provide reasonable assurance of the achievement of these objectives.

 

Notwithstanding the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to report material information otherwise required to be set forth in the Company's reports.

 

 

 

 

 

The amounts above reflect the Company’s December 2006 two-for-one stock split. See Note 2 of the Notes to Consolidated Financial Statements for additional information. The Company’s Board of Directors authorized the repurchase of up to 80 million shares under the November 2001 program, as adjusted for the stock split.  The maximum number of shares that may yet be purchased under this program is 22.8 million as of March 31, 2007. 

 

 

 

At the Annual Meeting of Stockholders on February 6, 2007, matters described in the Notice of Annual Meeting of Stockholders dated December 15, 2006, were voted upon.

 

 

 

 

 

 

 

 

 

 

Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.